Question

Neptune Company has developed a small inflatable toy that it is anxious to introduce to its customers. The company’s Marketing Department estimates that demand for the new toy will range between 15,000 units and 40,000 units per month. The new toy will sell for $10.00 per unit. Enough capacity exists in the company’s plant to produce 20,000 units of the toy each month. Variable expenses to manufacture and sell one unit would be $6.00 , and incremental fixed expenses associated with the toy would total $34,000 per month.

Neptune has also identified an outside supplier who could produce the toy for a price of $5.00 per unit plus a fixed fee of $47,000 per month for any production volume up to 20,000 units. For a production volume between 20,001 and 45,000 units the fixed fee would increase to a total of $94,000 per month.

Required:

1. Calculate the break-even point in unit sales assuming that Neptune does not hire the outside supplier.

2. How much profit with Neptune earn assuming:

a. It produces and sells 20,000 units.

b. It does not produce any units and instead outsources the production of 20,000 units to the outside supplier and then sells those units to its customers.

3. Calculate the break-even point in unit sales assuming that Neptune plans to use all of its production capacity to produce the first 20,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 20,000 additional units.

4. Assume that Neptune plans to use all of its production capacity to produce the first 20,000 units that it sells and that it also commits to hiring the outside supplier to produce up to 20,000 additional units.

a. What total unit sales would Neptune need to achieve in order to equal the profit earned in requirement 2a?

b. What total unit sales would Neptune need to achieve in order to attain a target profit of $48,500 per month?

c. How much profit will Neptune earn if it sells 40,000 units per month?

d. How much profit will Neptune earn if it sells 40,000 units per month and agrees to pay its marketing manager a bonus of 20 cents for each unit sold above the break-even point from requirement 3?

5. If Neptune outsources all production to the outside supplier, how much profit will the company earn if it sells 40,000 units?

Answer 1

1.The break-even point in unit sales assuming that Neptune does not hire the outside supplier

= Fixed expenses / contribution margin per unit

Contribution margin per unit = unit selling price - unit variable cost

= $10 - $6

= $6

Break-even point in units sales = $34000 / 4

Break-even point in units sales = $8500

2.(A) Profit neptune earn assuming it produces and sells = 20000 units

= contribution margin (units * contribution margin per unit) - fixed expenses

= $80000(20000 * $4) - 34000

Profit neptune earn assuming 20000 units = $46000

2.(B) Net profit = sales revenue - variable purchase cost - fixed fees

Sales revenue = $200000(20000*10)

Variable purchase cost = unit purchase from outside supplier * purchase price = $100000(20000*5)

Fixed fees = $47000

Net profit = 200000 - 100000 - 47000

= 53000

3.Break-even point in unit sale = ( contribution required from outside suppliers / contribution margin per unit from outside supplier) + units from own production

contribution required from outside suppliers = total fixed expenses - contribution from own production  

contribution required per unit from outside supplier = $81000 - 80000

= 1000

units required to buy from outside supplier = contribution required from outside suppliers / contribution margin per unit from outside supplier

= 1000 / $5 ($10 -5)

Break-even point in unit sale = units required to buy from outside supplier + unit from own production

= 20200

4.A Desire  profit = 47000  

as total fixed expenses = $81000

total contribution required   = 180000

less own contribution = 80000

contribution required from out side suppliers = 48000

/ contribution margin per unit from outside suppliers = 5

unit require from out side suppliers = 9600

add unit from own production = 290000

total unit required    = 29600

B.

Desire  profit = 48500

as total fixed expenses = $81000

total contribution required   = 129500

less own contribution = 80000

contribution required from out side suppliers = 49500

/ contribution margin per unit from outside suppliers = 5

unit require from out side suppliers = 9900

add unit from own production = 20000

total unit required = 29900

C. Contribution from own prodfuction = 80000

contribution margin from outside suppliers = (20000*5)

= 100000

total contribution = 180000

less fixed cost = 81000

profit neptune will earn if it sells 40000 units per month = 99000

D. profit will neptune earn if it sell 40000 units per month = 99000

Less commission paid to marketing manager (40000 - 20200*20%) = 3960

Net profit after commision paid = 95040

5.Sales unit = 40000

* contribution margin per unit outside supplier

contribution margin = 200000

less fixed cost = 94000

net profit = 106000